Poland's Slowing Inflation Sets Up Central Bank Battle

By Aaron Eglitis -
Sep 13, 2012

Poland’s slowing inflation is
setting up a battle among policy makers next month over whether
to cut borrowing costs and reverse the only interest-rate
increase by a central bank in the European Union this year.

Pressure is mounting on the Narodowy Bank Polski to reduce
rates from their highest level since 2009 after data yesterday
showed inflation fell to 3.8 percent in August, the slowest in
three months, and the EU’s biggest eastern economy expanded at
the weakest pace in almost three years in the second quarter.

The bank, whose Monetary Policy Council meets next on Oct.
2-3, kept is main rate at 4.75 percent last week even as policy
makers around the world ease borrowing costs to avert a slump,
saying a cut would require more proof the economy and inflation
are slowing. Yesterday’s data increase the chances next month of
a reduction, according to separate e-mailed notes by Polish
lenders BRE Bank SA, Bank Zachodni WBK SA, ING Bank Slaski SA
and Bank Pekao SA.

“Whatever we do, I think inflation will be back at the
target by the first quarter,” MPC member Andrzej Bratkowski
told broadcaster TVN CNBC in an interview yesterday. Bratkowski,
who’s called for a rate cut since July, said he can’t predict
when the bank will reduce borrowing costs even though there’s a
“large possibility” it will happen this year.

Bonds, Zloty

Polish bonds gained yesterday after the inflation report,
with the yield on the five-year note falling three basis points,
or 0.03 percentage point, to 4.30 percent. The zloty was little
changed at 4.0964 per euro, holding to this month’s 1.7 percent
appreciation, the second-biggest among more than 170 currencies
tracked by Bloomberg.

Governor Marek Belka, who heads the 10-member MPC, said in
an Aug. 31 interview with Bloomberg Television that the bank has
scope to reduce rate cuts as the economy slows. While MPC member
Elzbieta Chojna-Duch told TVN CNBC yesterday that she sees room
for “one big” rate reduction, Belka and Anna Zielinska-
Glebocka have been the only other council members to speak
publicly in favor of lowering borrowing costs.

“The market gets monetary policy wrong in Poland as it
does overprice the magnitude of rate cuts in the pipeline, in my
view,” said Benoit Anne, an emerging-markets strategist in
London at Societe Generale. The central bank “may indeed at
some point switch on to an easing cycle, but it will be later
and more gradual than what most investors think right now.”

Easing Inflation

While price growth has averaged 4 percent this year, a
slowing economy and a recession in several of Poland’s main
trading partners in the 17-nation euro region will curb
inflation to 2.8 percent next year and 2.5 percent in 2014, the
median estimate in a Bloomberg survey of economists shows.

The economic expansion eased to 2.4 percent in the three
months through June from a year earlier, the slowest pace in 11
quarters and down from 3.5 percent in the January-March period,
as domestic consumption declined and the euro-region debt crisis
curbed demand for the nation’s exports.

In May, Poland’s central bank became the only one in the
27-country EU to raise borrowing costs this year when it
increased rates a quarter point to combat inflation, which has
exceeded the 3.5 percent upper limit of the bank’s tolerance
range for 20 months.

Yesterday, Russia’s central bank unexpectedly raised all of
its policy rates by a quarter-point after price growth overshot
its target, splitting from policy makers in other major
economies focused on bolstering growth.

ECB Moves

European Central Bank President Mario Draghi said on Sept.
6 that policy makers had agreed to an unlimited bond-buying
program for struggling nations in the euro region, which is
grappling with an almost three-year-old debt crisis. The ECB
also facilitated borrowing against government-issued or
guaranteed assets by dropping rating requirements.

Traders are betting for the first time since 2009 that
Poland will cut rates by half a point. Forward-rate agreements
used to speculate on interest rates in three months have dropped
to 53 basis points below the Warsaw interbank offered rate, the
biggest discount since March 2009 and twice the 25 basis-point
gap a month ago, data compiled by Bloomberg show.

Still, Peter Attard Montalto, an economist at Nomura Plc in
London, said expectations for lower rates “are overblown in
both timing and scope,” even if they will come eventually.

“We don’t expect cuts until January, but they could occur
at the earliest in November,” when the government releases its
new inflation and growth projections, Montalto said by e-mail.